Discount rate saga drags on

The lord chancellor’s procrastination does not bode well. Insurers are stalling a long-overdue change.

Just as the protracted saga of the government's review of the discount rate appeared to be drawing to a close, we now learn it will drag on for another few weeks.

This is the rate that is applied to elements of compensation paid to injury victims for future losses. The current rate, fixed pursuant to the Damages Act 1996, is 2.5%. This means that it is assumed that accident victims will achieve a rate of return of at least 2.5% on their invested damages and their awards are discounted accordingly.

That was considered acceptable by many (although by no means all) in 2001 when the rate was last set by the then lord chancellor, Lord Irvine, as average returns on index-linked government securities (ILGS) were near that mark. Furthermore, the House of Lords decision in Wells v Wells [1998] UKHL 27 made it clear that ILGS yields most closely fitted the needs of investors requiring a safe long-term investment.

As the base rate has, however, been at historical lows since the financial crash of 2008, the ILGS rate has also been depressed and for some time now it has hovered at close to zero. After lots of gentle supplication from old mother APIL (Association of Personal Injury Lawyers), as long a go as 2012, the then lord chancellor, Ken Clarke, issued a consultation paper indicating that he was finally ready to grasp the nettle and get on with his revision of the discount rate. Since then, however, the task of completing the homework has shifted to two more equally reluctant pupils in Chris Grayling and then Michael Gove.

Unfortunately for them (not to mention accident victims) no amount of staring blankly at the consultation responses produced a magical solution, such as a sudden upturn in ILGS yields. On the contrary, base rate slipped yet further in 2016 and with it the prospects of an increase in yields on government gilts.

So it was to be expected therefore that last year old-mother APIL should again, this time with a raised voice, ask the lord chancellor to finally get on with the job. The new lord chancellor gave the appearance of being the studious type and also rightly nervous about the prospect of mother losing her rag and taking her to see headmaster (or at least, the administrative courts) for a well-overdue scolding. Liz Truss’s announcement that a decision on the consultation would finally be made at the end of January 2017 was accordingly welcome, even if absurdly overdue, given the plainly unreasonable prevarication of her predecessors.

Now, though, bad-tempered papa ABI (Association of British Insurers) has stormed in ranting and raving and telling all that would listen that they didn’t do things this way in his day. And whilst it’s true that pre-Wells the courts assumed claimants invested in mixed assets (and achieved a higher rate of return) that was before the introduction in 1981 of ILGS, which are tied to the retail prices index and thereby protected against inflation.

In Wells the House of Lords expressly approved the application of ILGS returns as providing the best guide to a safe return for a cautious investor who needed to be able to call upon the funds readily throughout the remainder of his or her life. The reduction in yields hasn’t changed this. The ABI appeared quite content when the consultation languished in the long grass and the revision was left undone.

Its decision to try and mount a judicial review of Liz Truss’s decision regarding the discount rate not only appeared premature, but looked suspiciously like an opportunistic intervention by vested interests. The recent decision of the High Court to refuse the ABI permission to proceed is welcome and hardly surprising. The chances of it faring any better at the Court of Appeal must be slim.

But the lord chancellor’s sudden and unexpected announcement that she is no longer intending to make an announcement on 31 January is a most unwelcome development. The statement, issued to the London Stock Exchange today, gives little away but it would appear that papa ABI’s bad-tempered and blunt intervention is diverting Liz Truss from the task in hand. The homework, the lord chancellor has nevertheless assured us, will finally be complete in February.

I hope that as Liz Truss puts the finishing touches to it she heeds the age-old advice: mother knows best.